All Things in Moderation

Vital Statistics:

Markets are flattish after 4Q GDP was revised upward, but less than forecast.  4Q GDP has been revised upward to + .1% from -.1%.  Initial Jobless Claims came in at 344k. NAPM Milwaukee came in BTE at 56.5. Bonds and MBS are up on the news. 

The US GDP number was disappointing (the Street was at + .5%) and a drop in defense spending was a big factor.  Don’t forget 3Q GDP came in at + 3.1%, well in excess of the current 1.5% trend.  The government’s fiscal year ends in September, and there is a “use-it-or-lose-it” dynamic that goes on.  In other words, if an agency doesn’t spend their entire budget, it will be cut next year.  So even if they don’t actually need to spend the money, they will. The net effect is that government spending tends to accelerate in Q3 and then fall in Q1. You can see this in Table 1 of the official press release.  Punch line:  Take both 3Q and 4Q GDP numbers with a grain of salt. Of course, there is a battle royale going on between the right and the left about how to frame this whole issue as everyone deals with the sequester, which makes the signal to noise ratio miniscule.

Tidbits from the Bernank’s House Testimony yesterday:  A “significant majority” of the FOMC is supportive of current policy.  The Fed would prefer that US fiscal solutions be less front-loaded. They note some progress in the labor market and haven’t seen any significant problems in market functioning. He also gave some insight into the planned exit strategy:  to let the assets run off and then drain reserves.  He said it is a “reasonable guess” that unemployment will get to 6% by 2016.

It is getting easier to raise money in the housing market. There should be an uptick in IPOs for homebuilders this year as there is still a chasm between ease of financing in the private and public markets.  While yield pigs will jump on bond issues from the recently dead, non-public entities still struggle to get access to construction loans. The homebuilders are pretty rich at the moment, sporting P/Es around 30 or so.

Jack Lew was confirmed as Treasury Secretary.  His job will be the pit bull defending government spending and pushing for tax hikes. How this affects the dollar I have no idea. 

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Vital Statistics:

Markets are flattish this morning on no real news. Italian Sovereign Yields are slightly lower after the sell-off of the last two days.  Mortgage Applications fell 3.8% last week. Durable Orders dropped 5%, which was a disappointment, but most of that looks to be due to Boeing and their battery problem.  Strip out Boeing, and orders were up 6.3%, which is a signal that businesses are starting to spend on CAPEX.  Fed Chairman Bernake will address the House Financial Services Committee today.  Bonds and MBS are rallying. For those that follow technicals, it looks like the 10 year has broken out of its bear trend of the last 4 months. 

The Bernank spoke in front of the Senate Banking Committee yesterday and seemed to tamp down speculation that the Fed intended to end QE any time soon. Remember the December minutes seemed to indicate that there was a consensus forming that purchases of MBS and Treasuries would end sometime this year.  This accounts for the 15 basis point rally we have seen in the 10 year over the past few days. He also urged the government to find a way to kick the sequester can down the road and replace it with more gradual cuts, while at the same time playing down the “fiscal armageddon” predictions.  

Bernake assured the Committee that the Fed was monitoring the unintended consequences of low interest rates and said that the risks of new bubbles were offset by companies using low interest rates to lock in low borrowing costs for a long period. Almost on cue, Bloomberg has a story regarding this exact issue, where the yield pigs are feasting on junk bonds, which “trade like dot coms.” As an aside, Radian (remember them?  the mortgage insurer left for dead in the depths of the crisis?) They just priced a convert deal, 2 1/4s up 25. Its raining money out there..

Jamie Dimon said yesterday that banks are accumulating more capital than regulators require and will not know what to do with it in two years.  “Lend it” is the obvious answer, but if you can lock up long term capital in the bond market for less than your dividend yield, what are you going to do as a CFO?  

The jumbo market is coming back. While still nowhere near pre-crisis levels, jumbo origination is up 60% from last year. While still hard to get, the loans are priced aggressively, at about a 23 basis point spread to conventionals.  A pick up in jumbo activity may well foreshadow the return of the private label market.

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Vital Statistics:

Markets are higher after yesterday’s bloodbath.  Yesterday’s sell-off was blamed on Italian election results which caused a 32 bp sell-off in Italian sovereigns.  They have traded another 50 basis points wider this morning. The Bernank will testify before the Senate Banking Committee today.  Bonds are higher, continuing yesterday’s furious rally. The 10-year has tightened by 13 basis points and is trading at 1.87%.  MBS are flat.

The S&P Case-Schiller index of home prices rose 6.8% YOY and .88% MOM in December. The only MSA with negative growth was New York.  Separately, FHFA reported that prices increased .6% MOM in December. They note that while the foreclosure pipeline is still high, the actual number of homes available for sale is very low and falling. 

Altos has a piece on why inventory is so low. First, they cite low housing starts. From 1957 – 2002, we averaged 1.5 million units a year.  Since the bubble burst, we have been hitting around 700k. Quickly ramping up housing construction is difficult. Second, there is psychological effect of sellers who now see the light at the end of the tunnel.  Prices are rising again, and they are hoping to get out flat. Finally, the government has emphatically sided with home owners over home buyers. They are pulling out all the stops to keep inventory off the market through foreclosure mitigation and refinance opportunities for underwater homeowners.  This has the net effect of restricting supply, which is good for existing homeowners, but not so much for first time homebuyers who want in. The net result:  2013 home price appreciation should be very strong. 

In confirmation of the above, the Despot reported a 13.9% increase in 4Q sales, with comps up 7%. While they attribute some of the growth to Sandy repairs, they mainly cite the improving residential real estate market. 

In a sign that the refi boom may be over, JP Morgan plans on cutting headcount in mortgage banking by 13k – 15k in an effort to cut $3B in expenses by the end of 2014. They see cutting 3,000 – 4,000 jobs in consumer banking this year, almost entirely by attrition.  The hits keep coming….

Bob Corker is saying the ball is in the White House’s court in order to confirm CFPB acting Chairman Richard Cordray.  A January court decision that Obama’s recess appointments to the NLRB were unconstitutional is giving Republicans a chance to press for changes to CFPB in order to bring more of it under Congressional control.  They are arguing for a 5 member bipartisan board, and for the budget to be subject to the normal appropriations process. 

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Vital Statistics:

Markets have a risk on feel this morning on no real news.  Elections are being held in Italy, with Bersani on track to win. Italian sovereign yields have tightened 20 basis points in response. Bonds and MBS are down.

Sequester week. Bob Woodward had a column over the weekend that said, WH protestations aside, that the sequester was Obama and Lew’s idea in the first place. The WH is releasing all sorts of gloom and doom scenarios about what will happen if sequestration happens. Republicans seem to be content to allow the cuts to happen. FWIW, I do not believe the markets care one way or the other about the impending sequester. 

The Chicago Fed National Activity Index showed growth moderated in January, falling to -.32 from a revised +.25 the previous month. Production related indicators explain most of the weakness, although employment and consumption also were negative contributors. The 3 month moving average is still in positive territory, indicating that economic growth continues to be moderately above trend.

The Bernank will be testifying in front of Congress this week. These things tend to be partisan dog-and-pony shows where the questioners are more interested in getting the Fed Chairman to validate their worldview than they are in seeking actual answers.  Democrats will undoubtedly be pushing for Bernake to say that sequestration will be an economic nightmare, while Republicans will be pushing for him to say that spending and the debt pose a problem. Democrats will also be looking for support for raising the minimum wage. Republicans will probably want to drill down a bit on the end of QE. 

The Bipartisan Policy Center has released a report on the future of housing and the GSEs. With the government guaranteeing 90% of all mortgages these days, there is a push in Washington to get the private sector more involved. They envision phasing out Fan and Fred and replacing them with a “public guarantor,” who has a re-insurance role, stepping in only when private insurers are unable to make good on the loan. They also propose that the government get involved with providing affordable rental housing. 

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Markets are flattish on no real news. The Empire State Manufacturing Survey showed improvement in NY State for the first time in months. Bonds and MBS are flat.

Elizabeth Warren is fighting to keep the CFPB from being accountable to Congress. Senate Republicans are pushing to have the Bureau subject to annual appropriations and installing a 5 member board to increase transparency and accountability. Liberals are pushing for a straight up and down vote on Richard Cordray, who was installed through a recess appointment. 

Dr. Cowbell was on Bloomberg TV this morning pushing for the Fed continue ZIRP as long as possible, in order to sustain the US housing recovery.  He blames Japan’s lost decade on premature tightening by the Bank of Japan. He made is usual push for infrastructure spending and said we don’t have a debt problem. Of course the Fed is keeping the bond vigilantes at bay. Can they do so forever? 

Freddie Mac has released their 2013 Economic and Housing Market Outlook. Like Krugman, they note the nascent strength in housing and estimate that it could add .5% to GDP this year.  They see the 30 year fixed rate mortgage at 4% by Q413, with unemployment at 7.5% and housing starts at 1 million. They forecast that originations will fall by 15% this year as refis drop from a 75% share to a 40% share.  

Senate Democrats unveiled a plan to delay the sequester by replacing the non-defense discretionary spending cuts with tax increases and maintaining defense cuts. Of course it has zero chance of going anywhere –  it is more of a demagoguing opportunity for the President and an attempt to give the Heisman to an idea that was his to begin with.  It is increasingly looking like there will not be a deal on the sequester, so it will either (a) happen, (b) get delayed for a year, or (c) happen and then get fixed in the continuing resolution. 

Note:  The MR will be spotty next week as I will be on the Left Coast.

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Vital Statistics:

Markets are weaker this morning in spite of better than expected initial jobless claims and couple of new mergers (Berkshire Hathaway buying Heinz, and US Airways / American Airlines). The Eurozone economy weakened. Bonds and MBS are flat.

In the State of the Union, President Obama referred to “overlapping regulations” and called for streamlining the mortgage process.  The housing industry is hoping that means that the Qualified Residential Mortgage rule (promulgated by the banking regulators) and the Qualified Mortgage Rule (promulgated by CFPB) will become consistent with each other.  The sticking point is that the QRM rule is much more strict than the QM rule (QRM: 20% down, 36% DTI), vs QM (43% DTI). Bankers and consumer groups hope to have the down payment rule removed, and would ultimately like to see the QRM rule to match the QM rule.  It seems that there is some bipartisan consensus on this.

Speaking of the SOTU, Obama’s agenda drew little support from Republicans, who “called it dead in the water.”  John Boehner objected that his plan raises the price of employment and noted that when you increase the cost of something, you get less of it.  Mitch McConnell referred to it as “liberal boilerplate that any Democratic lawmaker could have given at any time in recent memory.”  John Thune noted that Obama would have a hard time getting Democrats to go along with portions of it.  Six Senate Democrats seeking re-election next year in states that supported Mitt Romney are going to be hard pressed to vote fore new tax revenues beyond what has already been approved.  At the end of the day, it will depend on whether Obama chooses to demagogue or deal. On the minimum wage, one Republican said it would have a chance if it was accompanied by a business package of tax credits and expensing rules to help small business.  Paul Ryan noted that Obama chose not to politicize immigration reform, which means that something can be done there.

Sen Tom Coburn, R-OK says the sequestration cuts are going to happen. I still think it is much ado about nothing.  Some facts:

Spending Side:

• Total Sequestration cuts:  $85 billion
• Requested increase in the budget from FY12 – FY13: $75 billion
• Net change in spending: ~ $10B (or about 6 basis points of GDP)

St Louis Fed Head James Bullard gave an upbeat presentation at Arkansas State University, noting that the Euro sovereign debt crisis seems to have calmed down and that some of the uncertainty in the US economy has been dissipating. The most important news came with the Q&A with reporters – he is not ready to call for an end to QE, and would defer any decision-making until this summer to see if the economy continues to improve. 

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Vital Statistics:

Markets are up slightly after retail sales came in as expected. Ex auto and gas, they disappointed. However, there was some fear that the Jan 1 tax hikes would curtail consumer spending.  At least this data point shows it hasn’t.  Although to be fair, a +.1% increase is nothing to write home about. Mortgage applications fell. 

CoreLogic’s latest Market Pulse previews 2013. They predict that the refi boom is over, but it will be some time before the purchase market comes back. They note that 2012 census data indicates that household formations increased by 1 million, which is getting back to normalcy.  As I have said before, there is a lot of pent-up demand here, as the low household formation numbers of the last 5 years have been driven by economic weakness, not demographics. They do forecast that margins may get compressed as lenders fight over a declining amount of activity. That said, you can’t turn a refi shop into a purchase shop overnight. They also do an interesting analysis of the expected effect of QM loans. Near term, it will probably increase the profile of the GSEs.  Longer term, it will greatly increase performance characteristics.  Anyway, lots of good stuff in here.  RTWT.

27% of borrowers who refi are shortening their terms, according to Freddie Mac.  Cash-out refis account for just 16% of refinances, while cash in refis have jumped to 39%.  Ironic that consumers are getting more conservative when the Fed is using every tool in its toolbox to get consumers to do the exact opposite. 

Looks like the sequestration cuts are going to happen.

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Vital Statistics:

Markets are flattish as the G-7 countries promise not to target currency rates with economic policies. Barclay’s is cutting 3,700 jobs. The President gives his state of the union address tonight, and it will focus on the economy and job creation.  Bonds and MBS are flat.

The National Association of Realtors reported that the median price of an existing home rose 10% in Q411 to 178,900 from 162,600 in Q411. That puts the median house price to median income ratio roughly at 3.53x, which is towards the top of its historic 3.15 – 3.55x range. This begs the question:  Is housing overvalued?  Perhaps, but wages have gone nowhere for 6 years.  Perhaps this time, wages catch up.

Chart:  Median House Price to Median Income Ratio:

The National Federation of Independent Businesses released its Small Business Optimism survey, and while it increased, it was still a dismal reading. On the plus side, more small business owners are hiring than firing. Capital Expenditures are increasing, although they are still in maintenance mode. Overall, the report suggests that sentiment is improving, albeit from very low levels.

McGraw Hill (owner of Standard and Poors) comes out swinging against the DOJ in their latest earnings release. They point out that the US cherry-picked a few emails, and that alone is only evidence of an atmosphere of “vigorous debate” but not wrongdoing.  They note that they were downgrading CDOs with 2006 vintage RMBS a year and a half before Lehman failed (which actually co-incides with the beginning of the financial crisis, IMO).  I remember the credit markets beginning to freeze in the summer of 2007, which was being called a “buyers strike.”  Finally, they note that virtually everyone missed the housing bubble, and the fact that their actions proved to be insufficient in hindsight does not prove intentional misconduct at S&P.

The state of Nevada is taking steps to reduce shadow inventory by buying distressed pools of mortgages and working them out to reduce principal.  They will purchase homes at 70% of appraised value and re-work the loan or foreclose and re-sell the property.  It will be administered by a non-profit entity. It will be funded with receipts from the National Mortgage Settlement. Once the loan has been seasoned as a re-performer, it will be sold back into the market and the money recycled. 

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